China Mobile’s iPhone Factor

Selling the iPhone through China Mobile Ltd. – the world’s biggest carrier with over 700 million subscribers — will likely give Apple Inc. a boost. But it’s not clear how much of a leg up China Mobile can get.

For China Mobile, the iPhone is a way to secure a large user base for its high-speed fourth-generation network, after the carrier has lost some of its market share over the past few years to smaller rivals China Unicom (Hong Kong) Ltd. and China Telecom Corp. Both China Unicom and China Telecom already offer iPhones, and critics have also blamed China Mobile’s sluggish performance in part on its homegrown 3G mobile technology, which hasn’t been as popular as the 3G technology widely used around the world and also by China Mobile’s two rival carriers.

With 4G, China Mobile is getting a head start. The company launched its 4G service earlier this month and plans to make it available in more than 340 cities in China by the end of 2014, while China Unicom and China Telecom are still building their 4G networks. China Mobile is incentivized to push its fledgling 4G service “at the cost of (rather than with) profits,” Barclays Capital analysts wrote in a note shortly after Apple and China Mobile announced the iPhone deal.

Following the announcement of the deal, China Mobile’s shares, traded in Hong Kong, were up 1.3% at HK$80.95 after the Monday morning session. While the deal may help China Mobile expand its 4G user base, analysts remain skeptical about how positive it will be for its earnings, due to expected subsidies for selling 4G smartphones such as iPhones on top of its hefty investment in 4G network expansion.

Barclays maintained its Underweight rating on China Mobile, saying that “until a focus on profits reemerges, we struggle to justify reasons to own the stock.”

From Apple’s perspective, China Mobile’s impact on iPhone sales will likely depend on several factors, such as how much the phones will cost with contracts and what kind of deals on data usage and other terms China Mobile is willing to offer to attract users. The companies haven’t disclosed pricing details yet.

Apple said it didn’t have any further comment beyond its statement on the preorders.

Barclays analysts said that they are waiting for more information on the carrier’s subsidies, tariff plans and other conditions for its contracts for iPhone users.

The deal comes at a time when Apple’s smartphone market share in China trails those of Samsung Electronics Co. and several other Chinese handset makers.

Shanghai-based Canalys analyst Nicole Peng expects to see an immediate increase in iPhone sales from the January-March quarter after China Mobile starts selling them on Jan. 17.

“The timing is perfect because it’s a gift season before the Chinese New Year,” she said.

China Mobile currently offers Samsung’s Galaxy S4 as its main high-end 4G smartphone, but the iPhone 5S and iPhone 5C will likely play major roles in the carrier’s 4G push, Ms. Peng said. When China Mobile’s 4G service becomes available outside major cities in China, Apple can start to benefit from the carrier’s nationwide distribution channel that covers smaller cities and rural areas, she added.

A China Mobile spokeswoman declined to comment on pricing and other details.